Engaging in Aircraft Transactions Abroad-Key Issues Confronted in - - PowerPoint PPT Presentation

Engaging in Aircraft Transactions Abroad-Key Issues Confronted in Buying, Selling, Leasing or Financing Aircraft Outside of the U.S.

Wednesday, October 23| 1:00 p.m. – 2:00 p.m. Presented By: Sean Fitzgibbons James Meyer

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Engaging in Aircraft Transactions Abroad

• Different Types of Transactions

– Sale of aircraft inside of the U.S. for export – Purchase of aircraft outside of U.S. for import or for use outside of the U.S. – Leasing aircraft outside of the U.S. (as Lessor/Lessee) – Leasing aircraft from a foreign Lessor – Lending to a non-U.S. borrower to purchase aircraft – Borrowing from a non-U.S. lender to purchase aircraft for use in the U.S. – Chartering aircraft outside of the U.S. – Overflight – Combination of one or more of the above in multi-aircraft transactions, including “trade in, plus cash” deals

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Key Issues Confronted When Engaging in Aircraft Transactions Outside of the U.S.

• Aircraft Transactions conducted abroad are usually more complex, take

more time, and cost more then domestic transactions.

• Cross border aircraft transactions involve multiple U.S. and foreign

government agencies and the parties to such transactions must comply with a host of U.S. and foreign laws and regulations

• Accordingly, the parties to such transactions must carefully consider the

following key issues:

– Selection of appropriate local counsel – Requirements for export aircraft from the U.S. into another jurisdiction – Requirements for importing aircraft into U.S. from another jurisdiction – Applicability of VAT and other aviation taxes – Cultural Differences and potential challenges faced in different regions

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Retaining Counsel and Determining Scope of Retention

• Who has internal responsibility, oversight, and authority over transaction?
• Available resources, in-house knowledge & expertise?
• Time constraints and other limitations?
• General Contractor vs. One-Stop Shop?
• Alternatives to outside counsel?
• Complexity of transaction?
• Scope of engagement?

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Strategies for Selecting Local Counsel

What to Consider when Choosing Counsel:

• References
• Affiliations
• Credentials
• Membership in professional
• rganizations (e.g., NBAA Tax

Committee)

• Presentations and publications
• Experience
• Bench strength
• Communications
• Language (interpreters, document

translations)

• Fees (alternative fee arrangements?)
• Written materials (e.g., differences and

common challenges, example closing checklist)

• Responses to the following questions…

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Strategies for Selecting Local Counsel

Questions for Local Counsel: De-registration/Export

• What are the costs and practical difficulties of de-registration/export?
• Who should apply for de-registration/export
• Is there a particular time period within which application for de-

registration/export should be made?

• How long does the de-registration/export process take?

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Strategies for Selecting Local Counsel

Questions for Local Counsel: Registration/Importation

• What documents are needed to register/import the aircraft and what are

the costs of registration/importation?

• How long does the registration/importation process take?
• Once aircraft is registered in the state of registration’s aircraft registry, will

any liability be imposed upon the aircraft’s owner or lender with respect to aircraft operation, maintenance, or insurance?

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Strategies for Selecting Local Counsel

Questions for Local Counsel: Lease

• Does the state of registration recognize the concept of a lease over the

aircraft?

• Which governing law is best?
• Should parties agree to arbitration?
• If aircraft must be insured locally, can re-insurance be placed overseas with

a cut-through clause?

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Strategies for Selecting Local Counsel

Questions for Local Counsel: Taxes

• Would payments made pursuant to any agreement relating to the aircraft

be subject to any tax? If so, is there a jurisdiction where such payments could be made to avoid the imposition of such tax?

• Is prior Central Bank approval required for such payments?

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Strategies for Selecting Local Counsel

Questions for Local Counsel: Other

• Which Conventions has the State of Registration ratified?
• Are there any legal idiosyncrasies to be aware of?

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Exporting Aircraft from the U.S.

• Obtain Export Certificate of Airworthiness (Export CofA)
• De-registration from FAA Registry
• Re-registration in foreign Registry

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Exporting Aircraft from the U.S.

Compliance with U.S. Export Controls: Key Questions

• What is being exported/re-exported?
• Where is it being exported/re-exported?
• Who is the end user/ultimate consignee?

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Compliance with U.S. Export Controls

Export Administration Regulations (EAR)

• Most aircraft, its engines, and aviation components are controlled for

export purposes by the U.S. Department of Commerce Bureau of Industry (BIS) under the EAR

• EAR controls all civil aviation products even after they are exported from

the U.S.

• Licensing Requirements are based on cross referencing the Export Control

Classification Number (ECCN) found on the Commerce Control List (CCL) with the Commerce Country Chart.

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Compliance with U.S. Export Controls

Foreign Assets Control Regulations (FACR)

• Administered by U.S. Department of Treasury Office of Foreign Assets

Control (OFAC)

• Implements trade embargoes against specific target countries and

individuals

– Almost total embargoes on Cuba, Iran, Syria, Sudan, North Korea – Limited sanctions against other countries – Specially Designated Nationals and Blocked Person List (SDN)

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Compliance with U.S. Export Controls

Other Export Controls

• International Traffic in Arms Regulations (ITAR) covers

– Aircraft equipped with anti-missile technology – Certain night vision equipment and NVG compatible cockpits – Most former military helicopters

• Certain civil systems, including inertial navigation systems, may require a

license to be exported, re-exported, or transferred to end-users in many countries.

• China military end user restrictions

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Compliance with U.S. Export Controls

Practical Effects of Compliance

Generally, most civil aircraft, engines, and aviation components may be sold

• r leased to most entities in most countries without a license, However:

– Sale or dry lease to embargoed countries is prohibited – Sale or dry lease to a barred entity or for a barred end-use is prohibited – Sale where the seller knows or has reason to know the aircraft, aircraft engine,

• r aviation component is intended to be resold or leased to an embargoed

country or barred entity for a barred end use.

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Compliance with U.S. Export Controls

Export and Customs Clearance for Sale or Lease of Aircraft

• File Electronic Export Information (EEI) electronically through the

Automated Export System (AES)

• File export manifest and e-APIS with customs
• Be aware that export procedures differ from port to port

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Importing Aircraft into U.S.

Importation is required when:

• Foreign registered aircraft enters the U.S. for the purpose of sale
• r purchase
• U.S. registered aircraft manufactured in a foreign country enters the U.S.

for the first time

• U.S. registered aircraft temporarily imported into a foreign country

returning to be based primarily in the U.S.

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Importing Aircraft into U.S.

• Obtain U.S. Airworthiness Certificate
• De-registration from foreign registry

– Ensure that Foreign Registry’s Notice of De-Registration is “acceptable”

• Re-registration with the FAA

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Importing Aircraft into U.S.

Customs Requirements

• Customs declarations must be filed before the aircraft enters the U.S. for

importation

• Notify CBP of intent to land and enter the U.S. a minimum of 2 hours and a

maximum of 24 hours prior to arrival

• Have all necessary documentation on hand to show to custom’s agent upon

entry into U.S.

• Complete Customs POA if utilizing a customs broker
• Post import bond

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Changing Tax Regimes in Latin America

• Old Regime: Pay VAT or obtain overflight permits
• New Regime: Operação Pouso Forçada
• Overview of VAT and other aviation taxes in:

– Brazil – Venezuela – Mexico

• Potential effects of “new regime” to application of VAT tax in Latin America

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Recent Developments in Brazil

Operação Pouso Forçada

• In June 2012, a task force of Brazilian tax police, federal police and ANAC

(the Brazilian Civil Aviation Authority) seized 21 business jets for alleged tax evasion

– The authorities alleged aircraft was repeatedly flying in and out of Brazil to renew temporary admissions permits and that records indicated usage patterns consistent with Brazilian ownership and use – U.S. Non-Citizen Trusts seen by authorities as a tax evasion strategy

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Recent Developments in Brazil

Operação Pouso Forçada

• Brazilian authorities have since targeted a number of other aircraft
• It has been reported that some of the owners have settled with the

government while others have appealed

• As of August 2013, the Revenue Service issued a notice that some of the

seized aircraft will be sold at public auction

– Such aircraft include a Bombardier Challenger 300 and a Bell Helicopter. The

• wners of these aircraft have appealed to block the sale.

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VAT and Other Aviation Taxes in Latin America

VAT taxes in Brazil

• VAT consists of:

– IPI (federal VAT) – ICMS (state VAT) – Withholding tax

• IPI is either 10% or 5% of the value of the aircraft
• ICMS varies up to 35% depending on the state the aircraft is imported into
• Usual rate of withholding tax is 15% of the interest portion of a payment

– However, the rate is increased to 25% if the payee is located in a jurisdiction classified as a tax haven by the Revenue Service

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VAT and Other Aviation Taxes in Latin America

Tax Implications of Leasing/Ownership Structures

• Finance Leases/Contracts of Purchase and Sale

– Aircraft imported into Brazil under finance leases or contracts of purchase and sale have been admitted into Brazil through a process known as “naturalization” – Such transactions are subject to IPI, ICMS, and withholding taxes

• Operating Leases

– Until recently, nearly all Brazilian cross border aircraft transactions have been structured as operating leases to avoid heavy tax burden – Aircraft imported into Brazil under operating leases had been admitted into Brazil through “temporary authorization” which allowed aircraft to remain in Brazil for a fixed period of time (usually equal to the lease term) – Import taxes were applied pro-rata according to the length of stay of the aircraft in Brazil.

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VAT and Other Aviation Taxes in Latin America

Recent Legislative and Regulatory Changes Place New Burdens on Business Aircraft Operators

• As of May 2013, operators that are not airlines or air taxi companies are no

longer eligible for temporary admission, as a result, business aircraft

• perators cannot enter into operating leases.
• In order to directly import aircraft into Brazil, business aircraft operators

must either purchase the aircraft or enter into finance leases and pay IPI, ICMS, and withholding tax

• It is likely that the legislative and regulatory changes will be challenged in

the courts, but for the time being operators and financiers should adapt to new lease rules.

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VAT and Other Aviation Taxes in Latin America

Venezuela

• VAT Taxes in Venezuela

– IVA (VAT) is currently set at a rate of 12% – Additional 10% “luxury tax” added to IVA is applied to aircraft imported into Venezuela for “recreational use”

• Tax Implications of Leasing/Ownership Structures

– Operating leases are subject to IVA: the domestic lessee is obligated to pay IVA

• n behalf of the lessor

– Operating lease payments are subject to corporate income tax, except to the extent such taxes may be reduced by double tax treaties

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VAT and Other Aviation Taxes in Latin America

Mexico

• VAT Taxes in Mexico

– IVA is currently set at a rate of 16% – In bordering regions (i.e. with the United States, Belize, or Guatemala) IVA is set at a rate of 11% – Exempt from IVA: Aircraft sold to an airline for the commercial transport of passengers imported into Mexico on a temporary basis, not to exceed 10 years. – Air taxi companies can mitigate IVA impact on aircraft purchases and imports

• “Invoice-Credit” System

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VAT and Other Aviation Taxes in Latin America

Mexico

• Tax implications of Leasing/Ownership Structures Tax implications of

Leasing/Ownership Structures

– Finance Leases: 15% withholding tax applied to interest portion of payments – Operating Leases: popular and tax efficient

• US citizenship requirements must be met
• IVA may apply in Trust scenario if Trustor is a Mexican citizen
• Other

– Aircraft usage fees are increasing

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Potential Effects of “New Regime” to Application of VAT tax in Latin America

• In nearly all cross-border aircraft transactions, Latin American citizens have

structured such transactions to avoid or mitigate payment of VAT taxes

• Other Latin American countries may follow Brazil’s example to recoup the

VAT taxes which have thus far been avoided by their citizens

• Recently, the Mexican and Venezuelan Aviation Authorities have been

diligently monitoring and enforcing overflight permits and occasionally seizing N registered aircraft

• It is possible that other countries may also start enforcing overflight rules in

this manner in furtherance of VAT compliance by seizing N registered aircraft.

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Engaging in Aircraft Transactions in Asia

Issues to Consider When Engaging in Negotiations

• Be aware of cultural differences

– Different approaches to deals, negotiations, and due diligence.

• Understand that “different” ≠ “wrong”

– Generally, personal relationships precede business relationships

• Language Barriers

– Engage the services of a professional translator – Even with working knowledge of English, a party still may prefer to communicate through a translator. Accordingly, never speak English with assumption that you are not understood.

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Engaging in Aircraft Transactions in Asia

General Entry Requirements

• Landing permits and/or slots are generally required
• Overflight permits often required
• Visa requirements vary and should be examined on a case by case basis
• Many ports require a stamped general declaration from the last point of

departure

• Double check all dates and times

(Don’t forget about the International Date Line)

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Engaging in Aircraft Transactions in Asia

Challenges to Be Aware Of

• Limited Infrastructure

– Infrastructures built with airlines in mind not to accommodate business

• perators
• Limitations with regard to capacity (i.e. Japan and India)

– Very few FBOs – Lack of Hangar Space – Hong Kong is the exception

• Airspace Access

– May require clearances to operate in airspace (i.e. military aircraft clearance required in India)

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Engaging in Aircraft Transactions in Asia

Challenges to Be Aware Of

• High User Fees

– Navigation Fees per kilometer – Landing fees – Overflight fees – Ground handling fees – Passenger fees

• In China, new regulation imposes passenger fees for all flights originating

in China (Rmb 50 for domestic flights and Rmb 90 for international flights)

• High Duty and VAT taxes
• Government restrictions

– For example, a business entity in India must obtain government permission to purchase aircraft

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